State of the Union address: Can Obama pull off corporate tax reform?

In what will probably be the usual endless laundry list of State of the Union promises, President Obama is likely to include tax reform, by which he means a rewrite of the corporate revenue code. The White House seems ready to take a run at lowering corporate rates and scaling back targeted business subsidies. So is House Ways & Means Committee Chairman Dave Camp (R-MI), who is taking the lead in both individual and corporate reform.

But any corporate tax initiative will run into an odd coalition of resistance: liberal Democrats and big segments of the business community itself.

Progressives are fine with ending business subsidies, of course. But only if some of the new revenue the effort generates is used to either buy down some of the automatic spending cuts due to bite over the next decade or helps reduce the deficit. Obama, by contrast, seems ready to reform corporate taxes in a way that produces the same amount of tax revenue as today’s code.  

The tension between these two goals becomes transparent when, for instance, Obama talks about some of his favorite business tax targets—special tax breaks for corporate jets and oil production. Sometimes, Obama vows to kill these subsidies in the name of deficit reduction. Sometimes, he’d ditch them to finance lower corporate rates. But even presidents can’t use the same money twice. 

Business resistance is more complex-and often more subtle. At 20,000 feet, most businesses favor lowering corporate rates. But at ground level, matters are much messier. There, the battles promise to be nasty and the solutions sometimes intractable. There is no way to avoid it: There will be big winners and big losers. And the losers (and their lobbyists) will scream bloody murder.

Some of the battles are easy to predict: domestic businesses v. multinationals, manufacturers v. service firms, business whose value-added is in their intellectual property v. those who deal in commodity products. Other controversies will be apparent only to those who live deep in the weeds, but big bucks will be at stake. For instance, intellectual property firms allocate costs in different ways, and the very specific details of new international tax rules will benefit some firms and hurt others.   

Then, there is the question of what to do about the millions of business that don’t pay corporate income tax at all.  The owners of these firms (pass-through entities such as partnerships, S corporations, and limited liability companies) pay tax at the individual rate, not the corporate rate. A new top corporate rate of, say, 28 percent won’t blend well with a top individual rate in excess of 40 percent (once you add the limitation on itemized deductions to the top rate of 39.6 percent).

As a result, the White House and Congress will have to figure out some way to marry corporate and individual business tax rules–yet another huge challenge.    

Camp would like Congress to address both individual and corporate reform this year. White House officials say Obama is serious about a corporate tax rewrite, but he does not seem prepared to take on the individual revenue code as well. Obama will have his way, since no tax reform is possible without the enthusiastic support of the president. But it remains to be seen whether even corporate reform is possible in 2013. Gun control may be easier.